Lifecycle Costing – Seeing the ‘a Bigger’ Picture

The job of a project manager is ‘simple’. Similar to the role of a leader, a PM is required to always see the bigger picture. For some, seeing the overall of situations comes easy, while for others it could be mind-boggling. At certain stages of a person’s career, it is necessary they familiarise themselves with broad picture abilities. This visionary attribute of a project manager is one of the key reasons a project manager can head professionals of any background. The magnitude of the risk factor should be captured in the lifecycle equation.

Lifecycle costing Variations Could give better Insight:

Typically, most lifecycle cost is based on capital, maintenance and decommissioning costs. In most cases, the cost of risk is captured within those contexts. It is however obvious that some risk cannot be estimated within these variables because the values are too large and will thus lead to project rejection. A case where the cost of a risk is equal to the capital cost of the project is usually not fathomed. In reality, this does occur and there is evidence.

Lifecycle Cost = Capital + Maintenance + Decommissioning

Considering a new variable called ‘disaster’ as a single cost component of the lifecycle cost. This disaster value can indeed be multiples larger than the capital cost. If indeed this component was included in most projects, some existing infrastructure will not be put up. It is however an important step to establish during project selection.

Lifecycle Cost = Capital + Maintenance + *Disaster* + Decommissioning

A 50GW nuclear power plant PP will cost $64bn to construction. Another form of power generation is a wind plant of 50GW which has a capital cost of $100bn. Assuming the maintenance and decommissioning cost are identical in both cases, the nuclear plant will be chosen even by the best experts. History will prove to us however that the cost of a nuclear power disaster could amount to 2 – 3 times the capital invested in the project. Examples abound. Chernobyl power plant had a disaster cost of $60bn which in itself can construct a new nuclear PP. A perfect case with a simplified lifecycle cost is the Fukushima PP.

Fukushima Plant Lifecycle cost = ~$30bn + Maintenance + $188bn + Decommissioning

Let’s say a project is to be selected between a 50GW nuclear or wind PP and the following are the metrics:

50GW Nuclear PP Lifecycle cost = $64bn + Maintenance + $188bn + Decommissioning

50GW Wind PP Lifecycle cost = $100bn + Maintenance + $2bn + Decommissioning

Which project is likely to be selected?

These of course are a food for thought and an encouragement to lay bare the realistic lifecycle cost of a project.



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